Apr 28, 2017 Philip Burgess
According to a survey from Thomson Reuters, 89 percent of business managers have not had a positive experience with know-your-customer endeavors. In contrast to many other studies of KYC practices, Thomson Reuters spoke with corporate leaders who were not working in financial institutions. As a result, the researchers learned how KYC mandates were impacting commercial banking customers.
The study brings KYC under a new light. Anti-money laundering and KYC obligations impose costs on customers and create negative experiences. What can FIs do to address this issue?
1. Consult Expert Legal Advice
In-house general counsels can only know so much. They not only have to spend time reviewing KYC legislation but also must allocate resources toward interpreting commercial and consumer lending laws.
Dan Ryan, financial services advisory practice leader at PricewaterhouseCoopers, wrote a blog post for the Harvard Law School Forum on Corporate Governance Financial Regulation which discussed this very issue. He maintained that the U.S.'s Financial Crimes Enforcement Network delivered customer risk assessment criteria that were "largely left open to interpretation."
To minimize business transaction delays, FIs should consider consulting legal experts specializing in financial crimes law. It won't necessarily be a silver bullet, but it could help in-house general counsels better understand what their organizations have to do in order to comply with KYC and AML initiatives.
2. Gather Information From Watchlists
Perusing multiple watchlists one by one isn't practical, but there are watchlist search applications which aggregate information from dozens of government agencies.
Make sure the watchlist search solution you choose is built to screen applicants against anti-terrorism and anti-money laundering sanctions. Some of these applications are designed for businesses that want to ensure their customers or employees have no prior criminal activity, but do not focus on financial crime specifically.
Also, review the agencies from which watchlist search applications receive information. Listed below are a few federal and international databases the application should search:
- FBI Most Wanted Lists
- Nevada Gaming Control Board - Excluded Person List
- U.S. Department of State - Sanctions & Foreign Terrorists Lists
- Interpol - Wanted Persons
- CIA Chiefs of State and Cabinet Members of Foreign Governments.
3. Institute Stronger Data Governance
A data governance program will minimize record errors and ensure your institution has the information required to meet KYC compliance standards.
Implementing a data governance program involves identifying the information required to satisfy certain business processes. For example, a key part of the due diligence process is to confirm an applicant's overseas business relationships. In this case, you should identify the most efficient manner to obtain that data, who will have access to the information and at which stage of the application process you should collect this information.
"36% of insurance companies use machine learning to detect fraud."
4. Use Machine Learning Technology
Thanks to cloud services such as Azure Machine Learning Studio and Amazon Machine Learning, FIs can access technology capable of learning how to identify the risk associated with a certain business relationship. In-house developers don't have to build ML applications from the ground up.
In fact, the technology is already in use among insurance providers. According to Earnix, 71 percent of insurance companies use ML to develop risk models, and 36 percent use the technology to detect fraud.
Arin Ray, an analyst at Celent, maintained that artificial intelligence systems can find gaps in FIs' data collection processes and recommend methods to correct those deficiencies.
"Traditional rule-based KYC-AML technology necessitates significant dependence on manual efforts particularly in alert investigation stage, (sic) which is costly, error prone, and inefficient," said Ray. "AI-enabled solutions can not only automate significant parts of operations but also offer superior insights through advanced capabilities for analyzing structured and unstructured data."
KYC isn't easy to conduct, but following these steps could help you reduce the costs associated with the endeavor.